Value Chain in OEM Coatings

Dr. Karl-Friedrich Doessel

November 2013

Agenda

OEM Coatings as part of total Car Manufacturing Cost Participants in OEM Coatings Value Chain Roles and Expectations of

Consumer OEM Paint Company Application Equipment Manufacturer Supplier of Raw Materials

Globalisation Regulatory Framework Differences in Time to Market along the Value Chain Summary

OEM Coatings as Part of total Cost

Source: McKinsey PTW-HAWK-Survey

Value Chain in Car Production

Total Process Cost Paint Shop Cost

(incl. CED)

Distribution

Manufacturing

Process

Material

R & D

25%

15%

55%

5%

70%

30%

Coating

Process

Material

OEM Coatings Value Chain

Supplier of

Raw Materials

Paint

Manufacturer OEM Consumer

Application

Equipment

OEM Coatings Value Chain

Roles and Expectations

Supplier of

Raw Materials

Paint

Manufacturer OEM Consumer

Application

Equipment

Consumer Role

Purchasing decision to buy new car

Expectations

Color, choice of color / differention Appearance Durability Cost Environmental compliance in car use and manufacturing

Consumer as a Customer

Lower Cost of car and color options

Higher Quality

Appearance, Durability, Color

Scratch resistance

easy to clean

matt surface

corrosion protection

multi color car

high chroma colors

Paint Quality: Areas of Focus

Source: GM, SurCar 2013

PQ: Exterior Appearance Contribution

Source: GM, SurCar 2013

Source: GM, SurCar 2013

Source: GM, SurCar 2013

OEMs Surcharge Policy on Colors (in Germany, based on online configuration options)

VW Golf VW Passat GM Astra Ford Focus Toyota Auris

# colors 36 12 11 8 9

no surcharge 1 2 2 2 1

avg. cost/ 1455 637 452 387 467

max cost/ 2140 1720 680 555 525

VW Phaeton Audi A6 BMW 520i BMW 740i Benz E200 Benz S

# colors 16 14 (+) 13 (+6) 13 (+4) 12 10

no surcharge 2 2 2 2 2 1

avg. cost/ 1642 943 829 (2517) 914 (2350) 976 1151

max cost/ 3900 2750 3600 2350 1963 2059

Color Economics

Today over 85% of car buyers select surcharge color

Customizing / differentiating a mass produced car

Based on 1 mio cars sold per OEM

added margin/profit for OEM color is

340 mio (Ford, GM)

up to > 1,000 mio (other OEMs)

added revenue for PaintCo is ca. 80 mio

Putting color on the car is a major part of value creation for the OEM

Outsourcing this process is hardly considered by the OEM

86 88 90

67 64 53

66 5956

5348

40

10

9

8

0

50

100

150

200

250

300

Standard 3 wet primerless

Total Cost of Paintshop / car

Indirect Matls

Energy

Labor

Capital

Paint

282

247 (- 35) 268 (- 14)

Paint Material Cost is 1/3 of total Cost Process Cost is 2/3

OEM Coatings Cost Structure

Cost/Car

Cost of Paint 90

Cost of Paintshop Operation 150 - 400

range defined by age/design of paintshop

Cost increment for effect colors versus solid colors

cost of Paint 20 cost of Manufacturing 20

Cost increment for effect color is < 10% of added revenue Color is a real money maker for the OEM

OEM Coatings Value Chain

Roles and Expectations

Supplier of

Raw Materials

Paint

Manufacturer OEM Consumer

Application

Equipment

OEM Role

Low cost manufacturing of durable, good looking cars

Expectations

Low cost, reliable, global supply of paint and equipment Attractive color design proposals from raw material - and

paint suppliers

Wide operating window from material and process high FROK Environmental compliance, reduced energy demand

CAGR of global Car Production

2013 - 2017

Regional Shift Follow your Customers

China is the biggest market for car production China and South Asia have the highest growth rates Paint production and raw material production have to follow Regulatory compliance becomes increasingly important

China emissions law requires w/b basecoat China GHS, chemical inventories REACh etc. make global sourcing more difficult

Globalisation requires capital, people/Know-how, and TIME !!

Average Time to Market in Automotive Coatings OEM R & D

Troubleshooting

hours days weeks months 2 years +2 years Project

Management

minor paint adjustments

Product upgrades (some new raw materials)

Strategic R&D, new raw materials, chemistries

Toxicologic testing, registrations required

Application Technology

Raw material Co.s typically work on a different time scale than paint Co.s

OEM Coatings Value Chain

Roles and Expectations

Supplier of

Raw Materials

Paint

Manufacturer OEM Consumer

Application

Equipment

Paint Manufacturer Role

Low cost, reliable, global supply of paint meeting OEM spec.

Create improvements in performance, color, cost

Environmental compliance of paint and safe use

Expectations

Low cost, reliable, global supply of raw materials

Environmental compliance of raw materials

Innovation offered with new raw materials and processes

Paint Company as a Customer

Lower Cost of raw materials

Consistent Delivery & consistent Quality

global availability (at competitive cost)

pretested raw materials

proven durability in formulations

broad application field covering all OEM specifications

Higher Quality

Appearance, Durability, Color

Environmentally Compliant Products

Differentiation to competitors

500 800

@ 3000

per color

200 colors,

1000 products

incl.

pairs, triples

for s/b, w/b, 3-wet

low bake,

bell-bell,

bell-spraymate

100

Annual Basecoat Development Task PaintCo Europe

PaintCo Styling OEM selection PaintCo Development new Product

sales

Cost pa: 2 Mio 10 Mio 1 Mio

150 DAS

colors

150

competitor

colors

150 PaintCo

colors

OEM Color Development

Cost Implications

In OEM component business the OEM (normally) fully pays the upfront development cost and necessary

investments (tooling) while the supplier agrees to a

fixed pricing curve

In OEM coatings the supplier (normally) bears all the development cost

Depending on the product lifetime volume development cost is a major cost contributor

70% of the product developments never go commercial

50% of the commercial products never travel the experience curve (less than 3 batches per year)

Value Creation - Subtotal

Average consumers pay 1000 to get special color

OEMs have average 90 cost/car for paint and additional cost of 40 to produce special color vehicle

(still average OEM profitability is only 5 10%)

Average OEM paint co. has profitability of 10% with substantial business risk in R&D and capital investment

OEM Coatings Value Chain

Roles and Expectations

Supplier of

Raw Materials

Paint

Manufacturer OEM Consumer

Application

Equipment

Application Equipment Manufacturer Role

Low cost, reliable, global supply of OEM paint shops

Paintshops with safe and compliant operation

Create process improvements for lower cost, higher FROK

Expectations

Paint materials meet new process requirements

Wide operating window from paint materials

OEM Application Equipment Manufacturer

Business Model different to other participants of value chain

(one time) investment versus variable cost Investment cycle for OEM paint shops: 25 years New business mostly based on

Regional growth / new plants in China Environmental regulations change to waterborne Cost reduction by process changes with payback < 2a

OEM Application Equipment Manufacturer

Source: Drr SurCar 2013

Reduced

Market Size for

Coatings

OEM Coatings Value Chain

Roles and Expectations

Supplier of

Raw Materials

Paint

Manufacturer OEM Consumer

Application

Equipment

Supplier of Raw Materials Role

Low cost, reliable, global supply of raw materials

Environmental compliance of raw materials

Innovation offered with new raw materials and processes

Expectations

Receive clear signals and longer term commitment from customers / partners in the value chain

- Painting / curing equipment

- OEM pilot series

- Investment and SOP

From Chemicals to Painted Car Body

.. 3 years + .

- R&D new monomers

- New resources

- Polymer synthesis / testing

- Industrialization

- Paint formulation / testing

- OEM tests and approval

.. 4 years + .

.. 5 years + .

.. 4 years + .

TSCA

KECI

IECSC .

OEM Coatings Value Creation Summary

OEM Coatings today offer long durability, attractive appearance and color choices

Average consumers pay 1000 to get special colors

OEMs earn more than 1 bio Euro by color choices

Paint Companies can only capture 5-10% of this

Raw Material suppliers capture 2-5% of the total

Globalisation is a major factor for growth

Regulations have to be observed when going global

Time to Market varies between days and 10 years along the value chain